I've kicked around the idea in the past and am kicking it around again. There's a lot that a local builder owns that I'd like to have and he's a good builder so I wouldn't mind him building the house. I've spoken with him and he says we can go the traditional way where I buy the lot from him, then secures construction loan and then roll it into a conventional loan. Or since he owns the lot, I can finance thru him and close with a conventional loan. Obviously the benefits are I won't have the extra hassle and I won't need as much free cash to put down as if I were to secure financing for a construction loan. The potential downside is I'm sure I'd probably be able to find better rates if I do it myself since he doesn't have much incentive to give me the best rate. But who knows.

Those of you who've built, what did you do and what would you suggest.

I'm not talking about financial problems (maybe indirectly) but make sure you and your wife agree on everything (plan wise) before you sign the contract. Everybody has their own idea of a perfect new house. Get ready for some "head butting":RpS_w00t:!

Amish are crooks.

Without knowing what rate he is charging you, vs. what a competitive rate is....no one can properly advise you.

Otherwise it's a simple opportunity cost question relative to what putting down less is worth to you.

I deal with just about every builder, custom home company and local developers who's the builder or developer?
Ive never built a home but I took a 1900 Victorian farm house condemned and completely renovated it. The contractor died two weeks after the closing. I was given the option of new contractor ( cost more) or I do it myself. The hardest thing was to get subcontractors to do the work and on a timely manner. The inspection process was also a problem always something that required the sub to redo. Buy the land hire a builder finance it together. Have your ducks in order once you agreed on a construction budget stick to it. Changing any aspect is costly and over budget.

gut;1594917 wrote:Without knowing what rate he is charging you, vs. what a competitive rate is....no one can properly advise you.

Otherwise it's a simple opportunity cost question relative to what putting down less is worth to you.

i have no no idea on either since we haven't gotten that far yet.
Not really something you'd need advised on either. I'm more or less wanting to hear what people on here have done and their experiences.

I used to work in construction, and probably built about 5 houses.

ZWICK 4 PREZ;1594921 wrote:i have no no idea on either since we haven't gotten that far yet.
Not really something you'd need advised on either. I'm more or less wanting to hear what people on here have done and their experiences.

I don't see an advantage to builder financed. Seems like a rip-off. Like I said, if the rate differential is small enough then the lower downpayment might make sense (or if you don't want to mess with a bank).

The only advantage I see to builder financed is the lower down payment. i'm sure the credit check will be even worse, and you'll lose some bank protections there.

My situation wasn't too much different than yours. I owned the land outright with no bank lien. I obtained a construction loan, had the house built and then rolled it into a 15 yr conventional loan. That was some 20 years ago.

Enjoy the process. It doesn't have to be stressful if you don't want it to be. It can be very rewarding to go through it with your spouse.

We just finished our last month. We did a conventional loan. The process is really fun. You get exactly what you want and get to go to the design center and basically pick everything out. Then while it's built you get to see if you still like your choices. The one big downside for us is probably waiting to fence in our yard and build a patio until next summer so the ground can settle first.

gut;1594925 wrote:I don't see an advantage to builder financed. Seems like a rip-off. Like I said, if the rate differential is small enough then the lower downpayment might make sense (or if you don't want to mess with a bank).

The only advantage I see to builder financed is the lower down payment. i'm sure the credit check will be even worse, and you'll lose some bank protections there.

that was the main reason I was interested. With a conventional way we'll put 20% down and with him it's 10%. We're not building a huge house so 20% isn't a ton of money and it's doable. But it will dent the savings. If we have an additional 25 grand at our disposal to use for emergencies and unexpected costs due to upgrades during the build, it makes it nicer.

Would you have to pay PMI? That can be expensive after putting pencil to paper. It's smart to leave yourself an emergency cushion, however a lower rate that lets you build a cushion (due to lower payments) over several years is ultimately smarter, if you're comfortable with that.

The other thing is that I don't expect rates to change significantly over the next 2 years. However, if you plan on being there for 10+ years you should really look at locking in a 30-yr fixed. Otherwise I'd go with a 5-7yr ARM. It (30-yr fixed) will cost you more over the next several years, but in the last 6-7 the savings could be very significant....rates just aren't going lower, and 3-4 years from now should be at least 200bps higher.

^^^

That was going to be my question because in 3-5 years my wife and I plan to build. With a conventional loan you have to put down 20% to avoid PMI. What I hate about PMI is that if you only put down 10%, it is an automatic 8 years of PMI. Any additional cash you may throw on your principal once loan payments start does not count towards the 20% paid you need to hit for the PMI to go away. So how does PMI work with a new build?

slingshot4ever;1594965 wrote:So how does PMI work with a new build?

I don't know, but it's not simply a matter of hitting 20% equity, either. For a new home, I'd guess you have to accumulate 25%+ of equity for PMI to go away.

$50 PMI per month might not seem like much, but after 8 years you're out $5000. The implied ROI is pretty decent if you look at the interest/payment saved by stretching to avoid the PMI - with where rates are right now, you're talking @7% pre-tax (that's PMI plus the interest incremental 10% downpayment)...if you can lock-in 7% guaranteed right now, that's a pretty decent investment.

We built the house we live in now. My inner control freak gets nervous about having one person in control of both the construction and financing - particularly if it's a one-man operation or a small firm. If he runs into financial problems (or, as noted above, something happens to him), you'd be in for an ugly time. You might want to take the builder's proposal to an attorney who specializes in real estate for an evaluation of the risks involved.

On the other hand, you are absolutely right about not tapping yourself out financially with the larger down payment. If your medium-term financial prospects are good, you might want to go with the lower down payment, swallow the PMI and higher rate for now, and save like mad with the idea of re-financing in about two or three years with the full 20% down. The downside is that you're screwed if mortgage rates rise significantly - I wouldn't plan on waiting for more than four years to refi - do the math based on the difference between the 10% down vs 20% down.

One other thing - a number of banks (PNC is one) are now lowering their "optimal rate level" from 20% to 15% down for customers with good financials. Sounds like that might be just the break you need. Even if you get the PMI albatross, the real savings in a lower interest rate over thirty years will more that offset that cost.

I think we're going to do construction loan if we decide to build with him. My parents are advising against having him finance for the reasons others stated, such as a controls the money if your aren't happy with the progression. They've offered to help out of anything comes up during the build. We'll still have money in savings so it shouldn't be a big deal. Plus whatever we can profit from the sale of our home.

Thanks for the input. You guys brought up a lot of things I never thought of.

We prepaid our PMI it saved us about 12k but we did have to have a little more cash upfront but not 20%. I don't think their offering this much longer though because the rules changed for lenders. We went they Arlington Bank and Joe Sauk and they were one of the last places still offering this type of loan. I think it's only available for people who have a contract done by May

Zwickau another thing to think about is how he would take care of any money that might have to go into escrow. I know when we moved in there's still some work that has to be finished on the outside of the house and money had to be sit aside for it.